Compulsory pensions back on agenda

MINISTERS have revived plans to force workers to pay into pension schemes, reports today claimed. The move follows announcements by a series of big companies that they are cutting back on their generous workplace pension schemes, leading to fears of a pensions crisis in decades to come.

Labour rejected the idea of compulsory pensions when it was floated by former welfare reform minister Frank Field in 1998, because of fears that voters would see them as a new form of taxation. But growing problems with workplace pensions have forced a rethink. Three inquiries ordered by the Government will report in July, and ministers could use their findings to press the case for compulsory pensions.

Prime Minister Tony Blair has been warned that focus group findings show more and more people worried about how they will pay for their retirement. Britain's ageing population, and the trend towards early retirement, are threatening to make the current system unsustainable.

While business leaders recognise the problem, they would be likely to resist any scheme which forced them to pay into their workers' pension funds. Stakeholder pensions introduced by Labour gave more workers the chance to pay into workplace pension schemes administered by private fund management companies, but employers are not forced to contribute. If no changes are made to the present system, more than two-thirds of pensioners could be left relying on means-tested benefits by 2050, according to experts.

The once-staid world of company pension schemes has been going though a radical reshaping in the past few years. Traditional final-salary schemes, which guarantee retired workers an annual payment based on a proportion of what they earned while working, are being replaced with 'defined contribution' schemes where the worker, rather than the company, bears the investment risk.

Some blame the changes on Government pensions legislation which introduced the 'minimum funding requirement', a strict guideline on how much money must be in a pension fund each year to meet its future needs. Faced with the prospect of diverting millions of pounds from profits into pensions, City finance directors have ordered the switch to the riskier form of fund.

Another blow to company pension schemes came in Gordon Brown's 1997 Budget when he scrapped a tax break worth £5bn a year to pension funds. Although the money appeared at the time to be a quick and easy gain for the new Government, the move could return to haunt Labour if it forces ministers to introduce an expensive and unpopular new pensions regime.

Coincidentally, the change-over from final-salary to defined contribution has happened while the stock market has been stagnant or falling - serving as a warning to savers that their pension schemes may not provide as comfortable a retirement as they had hoped.